Cayman sidesteps European financial services blacklist

After weeks of media fanfare, coinciding with the release of the Paradise Papers, and political horse trading behind the scenes, the EU has released a list of 17 countries it considers uncooperative in tax matters.

After a meeting in Brussels on Tuesday, EU finance ministers said American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates had not done enough to crack down on tax evasion and avoidance schemes.

The Cayman Islands and other U.K. overseas territories and Crown dependencies are not included on the blacklist but find themselves on a so-called commitment list. This graylist contains another 47 countries and jurisdictions that have made commitments in writing to meet the EU criteria applied to the process of singling out countries for their lack of tax transparency and “tax fairness.”

Another eight Caribbean jurisdictions – Anguilla, Antigua and Barbuda, the Bahamas, British Virgin Islands, Dominica, Saint Kitts and Nevis, Turks and Caicos Islands, and the U.S. Virgin Islands – affected by this year’s hurricanes will be assessed by the EU by February.

The publication of the new EU list followed a year-long screening process of 92 non-EU countries. EU member countries were exempt from the analysis.

In November 2016, the EU Council established three criteria that meant the examined jurisdictions had to be considered compliant on tax transparency, fair taxation and the implementation of measures to prevent tax base erosion and profit shifting (BEPS), a term used for the loss of tax revenue as a result of tax evasion and aggressive tax avoidance by multinational companies.

The 17 blacklisted countries failed to take proper action to address deficiencies identified, did not engage in a meaningful dialogue on the basis of the EU’s criteria, and did not indicate they would take action in the future, the EU Council said in a press statement.

The EU said tax legislation, policies and administrative practices in blacklisted countries have caused or may cause a loss of revenues for its member states. The listed countries are therefore strongly encouraged to make the changes requested of them, but the EU Council stopped short of agreeing specific sanctions. The lists will be updated once a year.

Lack of economic substance

The EU had no concern with Cayman’s tax transparency in relation to the exchange of tax information with other countries or the implementation of the OECD’s base erosion and profit shifting (BEPS) program. Cayman does also not offer preferential tax regimes that treat local companies differently than Cayman-registered overseas companies.

But, according to the EU Council outcome documents, the Cayman Islands – together with Bermuda, Guernsey, Isle of Man, Jersey and Vanuatu – has fallen foul of a fair taxation criterion, which is aimed at tax regimes that facilitate offshore structures which attract profits without real economic activity.

The Cayman government has “committed to addressing the concerns relating to economic substance by 2018,” the document noted.

In a statement, Cayman’s Ministry of Financial Services said, as part of this particular criterion, the EU wants to ensure that jurisdictions do not facilitate letterbox companies. These companies, which are set up to circumvent tax obligations, do not have physical presence, and therefore do not perform tangible economic activities, in the country where they are established.

“The majority of Cayman’s companies are not bricks and mortar, but they also are not letterbox companies,” Premier Alden McLaughlin said. “Rather, they are financial instruments that pool investment capital and facilitate international transactions.

“In addition, our transparency aids foreign tax authorities with their tax assessments. We provide taxpayer information to more than 100 countries, including all EU Member States and G20 countries. Thus, there is no interest in setting up these companies to circumvent tax obligations.”

In cooperation with the EU, the government said it is further assessing the fair taxation criterion, and will work with EU Council officials to address this issue by December 2018.

“This is in line with the Cayman Islands’ longstanding commitment to international cooperation, which has been recognized by international organisations such as the OECD, the Financial Stability Board, and the International Organisation of Securities Commissions,” said Tara Rivers, the minister of financial services.

Cayman Finance, the association that represents Cayman’s financial services industry, said the organization had worked hard with the government to address the concerns raised by the European Union and emphasized Cayman’s compliance record.

“The Cayman Islands meets or exceeds the highest global financial standards, sharing the same OECD rating as many EU Member States,” the organization said in a statement.

“We are confident that we will be able to address the areas where the EU requires some further clarification.”